Colorado Real Estate Journal - April 15, 2015
A private, local investor recently sold his portfolio of three small apartment buildings with a total of 80 units near Washington Park for a total of about $10.8 million The investor, a Denver lawyer who does not want to identified by name, then used the proceeds to buy the condo interest of two high-profile Denver restaurants. He bought the two retail floors (and basement) of the Wynkoop Brewing Co. in Lower Downtown and the Ale House at Amato’s in Lower Highland for about $19.6 million, as part of a 1031 exchange. The Wynkoop was launched by now-Gov. John Hickenlooper in 1988, before he entered politics, although he is no longer an owner. Breckenridge-Wynkoop LLC, the seller of the two restaurants, signed a long-term lease with the new owner in a sale-leaseback deal. The apartment sale is not huge in the Denver-area multifamily market, in which it is not uncommon for institutional investors to pay north of $40 million for apartment communities. Even transactions that top $100 million are not as rare as they once were. However, the transaction does illustrate a number of macro trends in the Denver area, said Justin Hunt, who handled the apartment sale with fellow ARA Newmark brokers Shane Ozment, Terrance Hunt, Andy Hellman and Kevin Jewitt. Justin and Terrance Hunt are executive managing directors at ARA, as is Ozment. Hellman is a director at ARA and Hewitt is a transaction manager. First, the apartment transaction illustrates how much demand there is for value-add apartment buildings in Denver, Justin Hunt said. “There was huge demand for this value-add portfolio,” Hunt said. More than 12 offers were received for the three small apartment buildings, he said. “The owner had owned them for years and basically had not done anything to improve them during that time, creating an opportunity for a buyer that could capitalize on their excellent locations,” Hunt said. The apartment properties are: •A 42-unit apartment building built in 1953 at 550 E. Third Ave.; •A 22-unit building built in 1960 at 50 Corona St.; and •A 16-unit building built in 1958 at 25 Emerson St. The Emerson and Corona properties sold for a total of $5.55 million, or $146,053 per unit and $243.31 per square foot. The Third Avenue property sold for $5.25 million, or $125,000 per unit and $224.36 pf. The buyer, he said, was a private group from Manhattan, New York. The buyer is an example of another trend, he said. That is, it is an out-of-state buyer that has never invested in Denver before. “This is a first-time buyer in Denver; they have not owned anything here before,” Hunt said. “This portfolio gives them a foothold in the market.” The portfolio sale also shows how attractive the central Denver market is, according to Hunt. “Whenever we have a property for sale in central Denver, we receive multiple offers from highly qualified buyers.” Everyone from private investors to institutional buyers bid on the three properties, he said. In the past, the properties would have been considered too small for most institutional buyers, which typically want larger properties that provide economies of scale, he said. “The buyer, actually, operates very much like an institutional investor,” Hunt said. Buyers especially liked the three properties because of their proximity to downtown, Cherry Creek North and, of course, Washington Park itself, he said. The buyer paid all cash and closed quickly, he said. The seller passed on offers for more money, he said. The clock was ticking on his 1031 exchange. He had to buy the retail sites in a 45-day time period, Hunt said, “in order not to have a taxable event.” And the capital gains on the apartment sale would have been huge. Records indicate the seller purchased the property in the early 1990s for $1.56 million. Even adjusted for inflation, the buyer paid the equivalent of $2.59 million in “real” dollars. “It goes to show that if you own a property and hold it through several cycles, you will get a very strong return from your investment,” Hunt said. With Denver apartments selling at record levels, it was a great time to sell, he said. Indeed, his purchase of the Wynkoop Brewing and Ale House, could be seen as an astute value play investment, said Riki Hashimoto. “Anytime you can sell something for a lower cap and trade into a higher cap, you are making a smart investment,” said Hashimoto, who handled the retail side of the transaction with his partner Dan Grooters. Both Hashimoto and Grooters are brokers at Newmark Grubb Knight Frank. “It’s amazing how strong the multifamily market is and it looks like it is just going to keep getting stronger,” Hashimoto said. The restaurants should be a great long-term hold, he said. “Wynkoop’s is just down the street from the Union Station and everything happening there. And the Ale House is just across I-25 in LoHi, which is one of the hottest neighborhoods in Denver,” Hashimoto said. “They are just fabulous infill locations,” Hashimoto said. “They truly are irreplaceable, one-of-a-kind sites.” The partnership that sold and leased back the restaurants is headed by Lee Driscoll of Wynkoop and Ed Cerkovnik, the founder of Breckenridge Brewery, he said. They decided it would be better to get the real estate off their balance sheet, in order to use their capital on their core business of operating restaurants. The buyer replaced an extremely management intensive business with one that is basically coupon collecting, he said. “He will just collect the rent,” Hashimoto said. “The restaurant group is responsible for everything. They manage the properties, they pay the utilities, they pay for common area maintenance.” He said trading from one asset class to another in a 1031 exchange happens fairly frequently, even though many investors specialize in one type of income-producing property. “It happens more often than you would think,” Hashimoto said. “Dan (Grooters) and I have seen investors trade into retail from other asset classes many times over the past 19 years,” he said. However, an investor familiar with one type of investment, such as apartments, does need the guidance of a broker familiar with the other asset class, he said. “They are totally different,” Hashimoto said. “When you are moving from one asset class, like multifamily to retail, you need someone who really understands what you are getting into.” He expects with apartments trading at such low cap rates that investors who sell them will increasingly be seeking other asset classes that have not appreciated as much. “Whenever you trade out of assets with a very low cap rate to one with a higher cap rate, you are probably making a smart move." Newmark Grubb Knight Frank in December announced that it was buying ARA for $110 million. “This is probably the first deal we have done with Newmark Grubb Knight Frank since the acquisition,” Hunt said. “It was really great working with Dan and Riki on this deal; it was a lot of fun,” Hunt said. Hashimoto couldn’t agree with him more. Hashimoto and Grooters had a relationship with the apartment seller for years and had talked to him about selling those apartments. “Obviously, he wasn’t the only bidder for Wynkoop’s, which has such great cachet and history, and the Ale House,” Hashimoto said. “These type of single-tenant deals are very sought after,” he said. “This was a long-term lease, an absolute triple-net deal, with a high-quality tenant in great locations. Investors love these kinds of deals.” He also is pleased that that ARA and NGKF could come together on the complicated transaction. “I love it when we can structure these kinds of deals for buyers and sellers,” Hashimoto said. “It was a lot of fun working with the ARA team.”